Hello John,
I have a small query regarding Real Method and Money Method.
Normally under the money method, we inflate each cash flow by the inflation rate and we discount using the money rate and the money rate that includes allowance for inflation.
My issue is that if we inflate each cash flow by the inflation rate and then discount using the a rate that includes allowance for inflation; are we not including the effect of inflation twice.
Thanks
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Investment Appraisal - Inflation
5y ago#1Inflating the cash flows increases the cash flows.
Discounting at the money/nominal cost of capital means discounting at a higher rate because of the inflation, which in a sense 'cancels' out the higher cash flows due to inflation.
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